In this article, I’ll explain why private lenders care about the borrower’s credit score, how it affects pricing, what the minimum score is for various loan types, and one way to quickly find the credit score requirements for various private lending companies (aka hard money lenders or bridge lenders).
Why Private Lenders Care About Credit Scores
Many real estate investors assume that private lenders don’t care about their credit history since private lending is mainly qualified based on equity in the property. This is only the case with a small percentage of lenders. The reality is the majority of private lending companies very much care about your credit score. It’s not always a deciding factor, but it definitely matters. The general theory is that real estate investors with poor credit are more likely to pay interest payments late, or default on the loan.
You might respond to that theory by saying that the lender can just take back the property in the case of a default or a foreclosure. However, professional private lenders do not want to own your property. A foreclosure is a lender’s worst nightmare. It costs a lot of money, and it ties up the lender's capital for a long period of time.
Some real estate investors get private financing from wealthy individuals who lend their own retirement funds. In many cases, those lenders don’t care about the borrower’s credit score, but they also don’t mind owning your property. Perhaps many of them may have never gone through a foreclosure process and just assume that they can easily take the property in case of a default.
I know several individual investors who have gone through this journey of initially not looking at the borrower’s credit score, then going through a bad foreclosure experience, then eventually having a minimum credit score requirement.
Some Private Lending Companies Don’t Care About Credit Scores
Having apoor or average credit score doesn’t completely prevent you from getting private financing. There are some private lending companies out there that don’t care about your credit score and don’t even check your credit. Instead, they would just do a background check to see if there is any financial fraud in your history.
These are typically local or regional lenders that have the ability to easily manage the property in case of a foreclosure. And you’re more likely to find them in states where the foreclosure process doesn’t take more than a few months - California, Arizona, Texas, Nevada, Washington, Missouri and others.
There are lots of private lenders that don’t have a minimum score requirement, but they still run a credit check. The main reason is they’ll want to see if you have anything significant in your history such as a foreclosure or bankruptcy or judgments. Another reason is to determine the pricing for their loan.
Most lenders will charge a higher interest rate to borrowers that have a poor or average credit score. For example if a private lender advertises that their interest rates range from 9% to 11%, a borrower with poor credit would likely be offered a rate at the higher end of that range.
Credit Score Requirement Depends on the Exit Strategy
If you’re getting a short-term private loan for a property that you plan to hold, and your plan is to refinance into a long-term loan, the lender has to care about your credit score since long-term loans always have a minimum credit score requirement. So a private lender may not provide the short-term loan if they don’t think you’ll qualify for the refinance.
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Most private mortgages max out at a term of 2 years, and while most lenders offer extensions, they don’t want to continue extending the loan term and just hope that your credit score will eventually increase enough to qualify for the long-term refinance loan. If your exit strategy is to sell the property within the 1 or 2 year loan term, you’re more likely to find a lender that would accept a low credit score.
Credit Score Requirement Depends on the Lender’s Capital Structure
The fact is, the majority of private lending companies in the United States today do have a minimum credit score requirement, and that’s because most private lenders use institutional capital to operate their business. What I mean by this is most lenders fund a loan with their own balance sheet and then immediately sell the loan to an institutional investor. The buyer of the loans sets the minimum credit score, and they don’t make any exceptions.
They don’t care about the story behind your low credit score. They don’t care if you own lots of properties and have years of experience. Institutional investors that buy private loans only look at numbers. If your credit score is below their minimum, your loan is too risky for them. So lenders that sell their loans typically have a minimum credit score and cannot make exceptions.
A smaller percentage of private lending companies use a different capital model and hold all of their loans on their balance sheet for the entire loan term. These lenders are more likely to be flexible with the borrower’s credit score, but that’s not always the case. We have some balance sheet lenders in our network that are more strict on credit scores than the institutional lenders.
What is the Minimum Credit Score Required for Most Private Lenders?
There are so many private lenders out there, each with different business models and different philosophies on credit scores. And the minimum score may vary based on the economic environment. During times of instability and uncertainty, which is what we have at the time of this writing in early 2023, lenders tighten up guidelines and increase their minimum credit score.
For the private lenders on our platform that do have a minimum credit score requirement, the lowest score we’ve seen for short-term loans is 600, but the majority of private lenders have a 650 minimum. For long-term DSCR long-term rental loans, the absolute minimum score is 680. And when you have a low credit score, you typically won’t get the highest leverage. With most lenders, you have to make up for a low credit score with additional equity and a lower loan-to-value.
One Way to Find the Minimum Credit Score for Many Private Lenders
Our website PrivateLenderLink.com could be used as a resource to find out the minimum credit score for various private lending companies. All the lenders listed on the site have a very detailed profile that shows their lending guidelines, including their minimum credit score. You can even filter by credit score.
Review each lender’s profile to learn about their requirements and contact them directly. The companies listed pay us a monthly advertising fee, so there is no cost to make contact with them directly. Please remind each company that you found them on PrivateLenderLink.com.
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